Homeowner Affordability and Stability Plan—February 18, 2009
On February 18, 2009, President Obama announced his Homeowner
Affordability and Stability Plan, designed to help up to 7-9 million
families avoid foreclosure by restructuring or refinancing their
mortgages. There are three main elements.
1. GSE Refinancing for Responsible Homeowners Suffering from Falling Home Prices.
Fannie Mae and Freddie Mac (the government sponsored enterprises, or
GSEs) will refinance the mortgages for 4-5 million homeowners with
loans owned or guaranteed by the GSEs.
2. $75 Billion Homeowner Stability Initiative to Reach up to 3 to 4 Million At-Risk Homeowners
The goal of the 3-year Homeowner Stability Initiative is to reduce the
monthly payment of homeowners to affordable levels using $75 billion
from TARP and the GSEs. The program will be available for home
owner-occupants “at risk of imminent default” even if they are current
in making mortgage payments, as well as those already delinquent. It
will only applies to mortgages at or below the GSE conforming loan
limits.
Key elements of the plan: The lender world first be required to reduce
rates, without assistance, so the monthly payment does not exceed 38
percent of borrower income (debt-to-income ratio of 38 percent). After
that, federal assistance would be used to match, on a dollar-for-dollar
basis, further reductions to bring the debt-to-income ratio down to 31
percent. After 5 years, the rate could increase gradually to the loan
rate in effect at the time of the modification. Lenders may reduce
monthly payments by reducing principal. Federal assistance would share
the cost (up to the amount the lender would receive for reducing
interest rates). As an incentive to loan servicers, they will receive
$1,000 up front for each qualified loan modification. For borrowers who
stay current on the modified loan, servicers will receive a monthly
“pay for success” fees up to $1,000 a year for 3 years.
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As an incentive to borrowers, borrowers will receive a monthly
reduction in their mortgage balance, up to $1,000 a year for 5 years.
As an additional incentive to help borrowers avoid going into
delinquency, servicers will receive $500 and mortgage holders will
receive $1,500, if they modify at-risk mortgages before the borrower
becomes delinquent. As an incentive for lenders to modify more
mortgages, the Obama plan—together with the FDIC—has developed a
partial guarantee initiative. The Treasury Department will establish an
insurance fund of up to $10 billion to discourage lenders from
foreclosing on mortgages, by limiting their lose if home prices decline
more than expected. Mortgage holders of modified mortgages could
receive a payment on each modified loan, linked to home price index
declines. Treasury will establish uniform guidelines for loan
modifications, working with bank regulators and the FDIC. All financial
institutions receiving Financial Stability Plan assistance will have to
agree to follow the guidance. The GSEs will use the guidance for their
loans, and the government will work to apply them “when permissible and
appropriate” to all federally owned or guaranteed loans, including
Ginnie Mae, FHA, Treasury, Federal Reserve, FDIC, VA and Agriculture
loans. The plan includes other elements, including:
Strong oversight .
“Allow Judicial
Modification of Home Mortgages During Bankruptcy for Borrowers Who Have
Run Out of Options.” Only mortgages under GSE loan limits would
qualify. Homeowners must first seek a loan modification. Legislation is
needed. The plan also anticipates legislation to give FHA and VA
authority to pay partial claims if there is a bankruptcy or voluntary
loan modification so holders of FHA and VA guaranteed loans are not
hurt.
Funding for displaced renters and neighborhood stabilization.
Improving Hope for Homeowners and other FHA programs.
3. Supporting Low Mortgage Rates by Strengthening Confidence in Fannie
Mae and Freddie Mac The Obama Plan beefs up the current support for the
GSEs. The Treasury Department is doubling, from $100 billion to $200
billion for each GSE, its pledge to invest money to make sure that the
GSEs maintain a positive net worth. This will further assure that the
federal government is committed to maintaining the mission of the GSEs.
In a statement issued today, Director Lockhart described this mission
as “providing much-needed liquidity, stability and affordability to the
housing market at this time.” He went on to say that doubling the
commitment “should remove any possible concerns debt and
mortgage-backed securities investors have about the strong commitment
of the U.S. Government to support Fannie Mae and Freddie Mac.” He
expects the increased commitment to help keep interest rates low, which
will help both current and future homeowners. The additional $200
billion is from HERA in connection with the conservatorship, not from
the Financial Stability Plan or TARP. Treasury will continue to buy GSE
MBSs, as announced when the GSEs were placed into conservatorship. The
GSEs will be able to increase their portfolios by $50 billion to $900
billion, and increase their outstanding debt. The Administration will
work with the GSEs to support state housing finance agencies.
